Goldman Sachs and the mystery of ‘revolving door’ bonuses

Would you prefer bankers to be doing “God’s work,”—how Lloyd Blankfein described the role of banks in 2009—or the government’s? And if a banker does government work, is he also, somehow, doing God’s work, and therefore deserves celestial pay?

Bank shareholders will need to ponder these issues, among others, as they weigh a set of proposals the AFL-CIO office of investment is now adding to bank proxies for next year. The proposals aim to get banks to explain their payouts of large, unearned bonuses to executives who choose to leave and take government jobs.

In an opinion piece published in November, TheWall Street Journal said AFL-CIO President Richard Trumka “and his liberal allies are on to something here, and we hope to make common cause with them in seeking more information on the important questions about Mr. Lew that were never answered in 2013.” Jack Lew was appointed U.S. Secretary of the Treasury last year and, the Journal item noted, “The terms of Mr. Lew’s original employment contract with Citigroup included a bonus guarantee if he left the bank for a high level position with the United States government or regulatory body.”

Seven banks—Morgan Stanley, Citigroup, Goldman Sachs, JP Morgan Chase, Bank of America, Wells Fargo, and Lazard—that “provide the opportunity for additional compensation to employees who leave the bank to work for the government” received letters from the AFL-CIO, according to a press release in late November. As a first step, institutional investors often send out letters before actually putting forth proposals on a company’s ballot.

Late last week, the AFL-CIO’s office of investment filed a shareholder proposal with Goldman Sachs—and they plan to file a similar proposal at JPMorgan this week, according to Heather Slavkin Corzo, who runs the AFL-CIO’s office of investment. Previously, the organization filed similar 2015 proposals at Citi and Morgan Stanley to address their “golden parachutes” for entering government service, Corzo told me.

To understand the pros and cons of the proposals in more detail, let’s take a trip down memory lane – and Goldman’s history is as good a place to start as any.

In 2007, the board of Goldman Sachs awarded its CEO, Lloyd Blankfein, a pay package of around $70 million dollars. In 2009, in an interview discussing his salary and banking practices, Blankfein explained to the Sunday Times that he was a banker “doing God’s work,” a phrase that captured the imagination of headline writers everywhere. (Rather than scoff, I ask that for a moment we suspend disbelief and see the world as Blankfein did.)

Now, let’s fast-forward to last year, to Blankfein’s remarks during a panel discussion at the Clinton Global Initiative in New York. Blankfein discussed how technology and globalization have created a “winner take all” economy – and that income redistribution is an insufficient solution because “people don’t want to just be sustained”—they want jobs. “Income redistribution is part of a fix of part of a problem,” but creating competitive products is key, he said. Blankfein also said that the contribution that businesses make, including Goldman’s work—in its “core,” financing businesses that create jobs—is an “extraordinary contribution to the world.” The Goldman CEO also argued that the bank had to pay employees sufficiently to retain them and ensure that the bank could be “stable” and function well.

The letter the AFL-CIO sent to Goldman Sachs on November 20 notes that accelerated vesting of incentive pay awards goes completely against the goal of employee retention. (Goldman did not respond to a call seeking comment.) In The New York Times last week, Andrew Ross Sorkin argued that perhaps accelerated vesting practices were a good thing, as it could attract bankers to devote their time and expertise to public service.

But does the government really need more bankers? Don’t the banks have enough paid lobbyists? And wouldn’t having more career civil servants—in other words, conscientious bureaucrats with no particular axes to grind—be better for everyone?

Corzo asks why banks would make these payouts: how can the awards be both in “the best interests of shareholders and not unethical?”

And if banks are doing God’s work — and “lift people out of poverty,” as Blankfein said at the Clinton gathering last year, how can encouraging talent to leave that work to join the government be beneficial for humankind?

In the spring, bank shareholders will get to vote on whether they should receive more information from banks about these payouts. If they want to win back some trust, Goldman and other banks should support these proposals and start rethinking their practices now.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://www.thevaluealliance.com), an independent board education and advisory firm she founded in 1999. She has been a regular contributor to Fortune since April 2010 and has advised shareholders and banks of every size on bank compensation.

Buffett: Detroit will be better, stronger after bankruptcy

Speaking in front of a Detroit audience on Thursday, Warren Buffett sounded an optimistic note about the struggling city’s ongoing bankruptcy trial.

Investing in Detroit, he says, is an increasingly appealing proposition, and will be “much better after the bankruptcy than before.” In part, that’s because the city’s finances were clearly unsustainable before now, and no one wants to invest in a place that’s headed for Chapter 9. But Buffett added that the city is going to be “employing a lot more people five years from now or 10 years from now,” than it does today.

That’s some much-needed good news for the former industrial mecca, whose well-documented descent into financial ruin has taken an immense toll on Detroit and its residents. Add Buffett to the list of people hoping that the bankruptcy trial, which began earlier this month, marks a turning point in the city’s prospects.

“I think as long as the bankruptcy is handled fairly quickly, bankruptcy’s fine—that is how you clear the slate,” Buffett said. He added that it’s been done before, when New York nearly went bankrupt in the 1970s, and when General Motors had to be rescued by the government after the financial crisis. Buffett now owns a significant chunk of GM stock.

The presence of GM and other major corporate headquarters is a boon to the city, Buffett said. But it’s also not a bad place to locate a business. “We would buy a company in Detroit today and we’d be happy to have the headquarters here,” he said.

Buffett spent the morning in Michigan. He was joined by Goldman Sachs CEO Lloyd Blankfein and White House Senior Advisor Valerie Jarrett at an event called Detroit Homecoming, a relatively small invitation-only event designed to show off the city’s ongoing rehabilitation efforts. The day also marked a celebration of area entrepreneurs that participated in Goldman’s 10,000 Small Businesses program.

The Oracle of Omaha spoke on Thursday afternoon with Dan Gilbert, the Quicken Loans CEO who has bought more than $1 billion in Detroit real estate in the last several years and who has pitched Buffett on Detroit before. The men covered a range of topics, including Buffett’s “obsession” with good public schools (Detroit’s schools are failing), and his prognosis for the American economy (it’s looking good). He also poked fun at Gilbert’s massive real estate investments, which will appreciate in value dramatically if property values in the city continue to climb. “If you want to sell me half of it at your cost, I’ll take it!” he said.

Of course, Detroit still has a long way to go before Gilbert’s real estate investments pay off in a meaningful way. Rents are climbing, particularly in the downtown areas, but it’s still cheap by most standards. The city is home to a stunning 139 square miles of blighted or abandoned land. Detroit’s bankruptcy was the largest ever of its kind in the country, and the city must still navigate a mess of uncharted legal territory.

But there’s hope. Detroit has grown closer to agreement on most of its restructuring plan, after bond insurer Syncora (the biggest opponent of the city’s plan) agreed to a deal on Monday.

“You don’t do it without cost,” Buffett said of the bankruptcy. “But it was important that Detroit cleared the slate, and it looks to me like they’re doing it promptly. And you know, I salute you for it.”

Why CEOs swear by Swatches

According to Google auto-fill, one of the most searched terms relating to Goldman Sachs CEO Lloyd Blankfein is, “What watch does Lloyd Blankfein wear?”

We have the answer: It’s a Swatch, a simple plastic timepiece that retails in the ballpark of $100. In fact, the executive has several of them—including a black one for formal events.

If you work on Wall Street, you’ve probably seen the look before: good suit, unremarkable shoes, digital watch. Witness Steve Schwarzman, CEO of Blackstone. Schwarzman not only owns multiple Swatches, he wears them in funky colors and designs. One particularly bright-colored edition bears the landmarks of his vacation home in St. Tropez.

Public-facing figures like Schwarzman and Blankfein may be expected to dress without excessive bling. And yet, as Google attests, it’s curious to see a plastic bangle on some of American business’s most powerful men. The list of power players who sport Swatches goes on: Tony Blair has one, as does French president Francois Hollande. U.K. hedge fund trader Chris Hohn has had a black one for years. AllianceBernstein CEO Peter Kraus is a fan of the brand. Even the boss of luxury watch maker Patek Phillipe reportedly wears one while skiing.

In a statement to Fortune, Switzerland’s Swatch Group didn’t have much to say about why politicians and executives might want to wear the budget accessory. The company’s Swiss roots and artistic designs may play a role, a spokeswoman said. When the Swatch was introduced as an alternative to Asian mass production in the 1980s, it was credited with helping to save the Swiss watchmaking industry. Ultimately, though, the watch brand’s patronage among the high and mighty is a bit of a mystery. “We assume that politicians have their reasons for wearing our watches,” the spokeswoman wrote, “but we don’t know what those reasons are.”

Plastic watches aren’t new in the halls of power. Even before the Great Recession made modesty a must, Timex Ironman watches had become a mainstay for leaders who either lack pretension, or have enough pretense to want to appear that way. Bill Clinton, for example, has worn an Ironman. The previous three Goldman chiefs also wore them. Hank Paulson’s was a gift from Stephen Friedman, says Goldman chronicler William Cohan. Jon Corzine, too, has been known to sport the look—which is on offer for about $40 at Target.

Why plastic? Putting aside the convenience of battery power, there are plenty of reasons not to go digital. The watch is the ultimate male accessory. In a world of subtle variations of dark suits and understated shoes, the wrist may very well be the one area in which is it socially permissible for a man to be sartorially dazzling (okay, yes, perhaps the tie as well). At the Baselworld tradeshow, the horological spectacle that wrapped up earlier this year, the watches on display did much more than tell time. Want to look at 12 different time zones in a single glance? No problem. One that tracks a dozen of your friend’s birthdays? Coming right up. How about a hand-finished model encased in rose gold? Only $510,900.

Increasingly, though, minimalism is in. Even at Baselworld, classic watches were resurgent. Collectors have become less concerned with ostentation than with authenticity. Comfort is also a growing priority. Pick your trend: “soft dressing,” “slobcore,” “athleisure”—today’s buzzwords speak to a fashion landscape that doesn’t have room for flashy Rolexes. The Gap is doubling down on yoga pants as the luxury loungewear category explodes. And more than one designer put sweatpants on the runway at this year’s Fashion Week.

Yet it’s more than the vagaries of style, or even simple reverse-snobbery, that has prodded executives to buy Swatches. At a big bank, a plastic watch is as intimidating in its own way as a diamond-studded Patek Phillipe. It signifies a passion for function and disdain for form. Goldman has long been known for its understatement when it comes to dress. A plastic watch exudes that characteristic aversion to flashiness, commitment to modesty, and, in a way, the maniacal work ethic endemic to finance.

That’s because Swatches—unlike, say, Vacheron Constantins—are extremely practical. You can work out in them. You can do an Ironman. (Blankfein is a swimmer, and the plastic Swatch dries easily.) Plus, unlike their mechanical counterparts, most cheap watches keep nearly perfect time.

The only thing more practical? Maybe a phone. But even Apple, which has played a leading role in the watch’s wardrobe displacement, clearly sees the merits of a wearable clock. The iWatch has been rumored for years, and we can only speculate about the myriad features it will offer. Luckily for Swatch, some people still just want to know the time.

Goldman rides tax inversions to top of M&A heap

The investment bank has made more than any other Wall Street firm advising companies on the controversial acquisition deals that have enabled U.S. companies to move their headquarters overseas and avoid U.S. taxes. According to Thomson Reuters, Goldman GS has raked in just over $200 million in fees in 3.5 years advising companies on how to do deals that will allow them to contribute less to the United States.

Goldman is certainly not alone in benefitting from inversions. It is closely followed by JPMorgan Chase JPM, which stands to make $185 million on these deals. The New York Times noted on Tuesday that, collectively, Wall Street firms are nearing in on the $1 billion mark in fees from the deals, and don’t forget all the fees charged by law firms and other advisors who work on these deals.

By jumping with both feet into inversions, Goldman has been able to regain the top spot among M&A advisors this year. According to Wells Fargo, through mid July, Goldman was an advisor on just under 30% of all completed global M&A transactions this year. That helped it secure the No. 1 spot over Morgan Stanley MS. This time last year, Goldman followed Morgan slightly on M&A transactions. But Goldman still led last year by the number of deals announced.

In response to a question from a Fortune reporter on an earnings conference call, JPMorgan CEO Jamie Dimon gave the tax inversion deals a thumbs up. He said as long as the U.S. was going to have a higher tax rate than other countries, American companies should feel free to move elsewhere. He likened the move to consumers who choose to shop at Wal-Mart WMT because it’s ostensibly cheaper than alternative options.

Goldman Sachs CEO Lloyd Blankfein does not seem to have made any similar statements on inversions, either for or against. Two years ago, as the U.S. was nearing the fiscal cliff, Blankfein wrote an editorial for the Wall Street Journal saying the government needed to raise more tax revenue. He said that President Obama had signaled that he was willing to make a deal on corporate tax reform, and Blankfein called for business leaders to work with the president. No deal was ever struck.

Inversions have become an increasingly popular way for U.S. companies to avoid the IRS, and they have come under increasing scrutiny. Fortune’s Allan Sloan recently called corporate executives who do inversions “positively un-American.” What’s more, Sloan argued that inversions undermined the U.S. tax base and that such deals will be bad for all shareholders in the long run.

You know who else is worried about inversions? Economists at Goldman Sachs. The bank recently noted in a report how much money the U.S. could lose in tax dollars because of them. Someone should show that report to the bankers.

Lloyd Blankfein’s path tothe pinnacle of ﬁnance nearly rivals for degree of difﬁculty that of his legendary predecessor Sidney Weinberg, who was one of eleven children of a Brooklyn bootlegger and started working at Goldman Sachs as a gofer shining spittoons, in 1907, a few years removed from elementary school. Blankfein moved with his family from the South Bronx—where he was born—to 295 Cozine Avenue, in the East New York section of Brooklyn, “in search of a better life,” he explained. He was three years old.

The family lived in the Linden Houses, a complex of nineteen buildings completed in 1957 that contained 1,590 apartments and was— at the time— a predominantly white, Jewish, public housing project. After losing his job driving a bakery truck, Blankfein’s father, Seymour, took a job sorting mail at night at the post ofﬁce — “which in our neck of the woods was considered to be a very good job, because you couldn’t lose it,” Blankfein said. The late shift paid 10 percent more than the day shift. “For the last few years of his life I’m sure he was doing something that a machine would have done better and more efﬁciently,” he said. Blankfein’s mother worked as a receptionist at a burglar-alarm company—“one of the few growth industries in my neighborhood.” Blankfein shared a bedroom with his grandmother; his divorced older sister and her son were in the next bedroom. (more…)